You know some of the answers to those questions. Why should governments be denied the ability to borrow, when virtually all other organizations in the economy: individuals, businesses, not-for-profit organizations, can do so. Used properly, debt can be the least expensive form of capital for accomplishing key tasks.
A government is an organization, just as a business is an organization. Businesses have a capital structure, which - if it involves debt - most likely involves perpetual refinancing. Non-profits also have debt, because non-profits have virtually no other source of capital (there is no such thing as “equity” in a non-profit, although there are arguments that “goodwill/reputation” is a kind of non-profit equivalent). You don’t want the government actually selling equity in a democracy, because that basically legitimizes the idea that you should be able to buy political authority, so if you ban debt, then there really isn’t anything that government can do.
Now people who want to starve the government actually like that solution. With no taxes and no ability to borrow, there’s nothing the government can do. Now, if you live in a police state, starving the government is arguably a good thing, but if you think things like schools, interstate highways, pollution monitoring, and a national defense are useful, then you’re going to need capital from somewhere. Taxes can give you some money out of current income, but you’re never going to be able to raise an army or build a highway system out of current income alone.
What would the economy be like if no borrowing were allowed to anyone? Standard economic theory says that it would be substantially less productive, because savers could not benefit from others’ need for capital, and others could not take advantage of business opportunities because they cannot access capital. True, savers could take equity stakes instead of creditor stakes, but 1) if you don’t have a corporate share structure, then there is a lot more risk and responsibility, so there’d be a lot less.
There are other issues too, like how do you invest when there is truly no risk-free asset. How do you hedge and arbitrage effectively, or calculate sharpe ratios without a risk-free rate. It’s true that there is no risk free asset in the most literal sense of the world, but US Treasury bills are about as close as you can get. Think about how you’d invest (or even live) when all assets are risky.
The crowding out effect is real, and it is a worry, but there are sometimes bigger things to worry about.
Printing money is also a concern, but more for the power it gives to the people first in line to spend and/or recieve the new money. On average, wages will increase in line with prices even with printing. The main problem with high levels of inflation is that business pricing becomes difficult due to uncertainties in the fluctuation of inflation rates and prices; therefore risk premiums increase, and business activities that are marginal become increasingly unacceptable. With more stable prices, you can afford to take riskier ventures. So it’s really the wage-price spiral that is key to watch, not the total amount of printing.
I’m increasingly coming to believe that we can’t get the employment situation moving until the real estate crisis fully clears, and I think that that’s not going to happen until we have enough inflation that a large portion of homes that are currently underwater are no longer so. I suspect that that means about 10-15% inflation total (not necessarily annually).
Inflation sucks, but I actually think it’s one of the better ways to work our way out of the debt mess we’ve gotten ourselves into (this is as much about private debt as it is public debt). When you look at who’s to blame for the crisis, there’s blame everywhere. Inflation is going to hurt everyone everywhere, and it may be a much more even distribution of pain than we would get if we tried to get everyone together in a room to agree on burden sharing (as if that would ever happen).